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UNIVERSITY OF 'LLlfMOIS LIBRARY , tiUOK.i TACKS CENTRAL CIRCULATION BOOKSTACKS The person charging this material is re- sponsible for its return to the library from which it was borrowed on or before the Latest Date stamped below. Theft< imitllatlen/ ond underlining ef books ore reasons for disciplinary action and may result In dismissal from the University. TO RENEWCALLTELEPHONE CENTEK. 333-8400 UNIVERSITY OF ILLINOIS LIBRARY AT URBANA-CHAMPAIGN Zuu lUDftWI USE Ofk^ S3 J m NOV 3 i» USE ONLY BlHLDtNG FEB 8 1995 FEB 8 1?95 OCT B 1 't BUILDING USE ONLY m 6 2000 Whenrenewingbyphone,writenewduedatebelow , previous due date. L162 Digitized by the Internet Archive 2011 with funding from in Urbana-Champaign University of Illinois http://www.archive.org/details/orerletter16univ )^-^^.^-^ 3R ORER /):\ LETTER.^:-* DrDinniAi Volume One, Nun ^^C ^ IQ Summer 1987 the University of Illinois Publicati AreB_ HERTZBERG — NEWMETHOD, INC. EASTVANDALIA ROAD, JACKSONVILLE, ILL. 62650 DEBUTS Mar sn TITLENO. ACCOUNTNO. LOTANDTICKETNO. vidii profs 0000«0000 DRERQuarterlyLetter stocj'"-© ORERKLfey TER' I is ;' fairrsetgoulfawrhpautblmicaaytiboen-of tyoj" )RER. Please write or iesi' flucl tio IC) tloecgoinvceeupst.yoTuhretOhoRugEhRts thesi r nowi ihonenumberis (217) Tl e 12. 0951. The addressison 42--SB .W33433220t5«-0R« "OLLAIN STAYS 01STX3. CLOTHCOLOR —HEIGHT es FoUain, theDirector 00 000 tyb est CHARGING INFORMATION SPECIALWORKANDPREP. leOfficeofRealEstate acr< FRONTCOVER HANDADHESIVE MAPPOCKETPAPER ;archforthelastthree higl LENGTHWISE MAPPOCKETCLOTH s, willcontinue asDirec- divl als THRUSEWONTAPE PEXATGREASTLHAIMCIKNNAETSESD FLIONREESIGONFTLIETTLTEERING SRPEEMCOIVAELWTAOTRTKLETAPE tor atleastone more hav ill and NEW ADVISOR doy imu I ty î preHlcteH"abovenormalr \îi^les Hillwasrecently ap- therateofreturn inmoni fi- pointedto theORER Advis- normal rates ofreturn. Ii jiti lef- ory Committee. He is Exec- marketresults inself-deft 'gl cie len utiveVicePresidentand Answers forthe firstfu ChiefOperatingOfficerof (whatcauses seasonaleffects.') areaccumulating Seasonality-Size Effects theChicagoFederalHome forthe stockmarketanomalies. However, these LoanBank. answers maynotultimately prove to becorrect. and REIT Efficiency ORER MOVES Forexample, there is a tax selling hypothesis which attempts to explain highJanuary rates of REITs orRealEstate InvestmentTrusts are return, theJanuaryEffect, incommonstocks. closed-endinvestmentcompanies thatbridgethe TheCollegeofCommerce This hypothesis is losing favorin theface ofev- gapbetweenstockmarkets andrealestatemar- andBusiness Administration idencethattheJanuaryEffectisfoundincoun- kets. Sinceshares inthesecompanies are traded is providing the ORER with trieswithmarkedlydifferenttax laws. There is on stockmarkets, they mightbe expected toex- renovatedfacilities which anotherhypothesis that attempts toexplain the hibitseasonalrateofreturn anomalies thatare will alsoconsolidate all the JanuaryEffectby asserting thatmutual fund similarto those ofcorporate stock. realestatefaculty inonelo- managers move into riskier-smallerstocks in REITprice andreturndatais the onlyready cation. Thenew suite ofof- Januaryinordertoincrease theexpectedreturn continuedonpage4 ontheirportfolioandthus increase theirexpect- continuedonpage2 . ORErt Letter Page continuedfrompage1 Figure 1 sourceofrealestatepricesandreturns basedon nearlycontinuous trading. Therefore,one source AVERAGE MONTHLY RATES OF RETURN 1962-85 ofinefficiency commonly attributedtoreal estate 15% markets, infrequenttrading, shouldbe absent fromREITprices andreturns. There are basically twotypes ofREITs: mortgage REITs and equity REITS. As the names 10% suggest, theportfolios ofmortgage REITs con- sist primarily ofmortgages, while the portfolios ofequity REITs consistprimarily ofequity positions in real estate projects. Atfirstglance, one mightsuspect thatthe equity REITs areriskier andhave higherexpectedreturns than the mort- gageREITs. Butthereverseis the case. Even though, it might seem as ifan equity position wouldexperience more variabihty than amort- gage position, it may be that something like in- terestrateriskhas madethemortgageposition -5% - FMAMJ ASONDJ riskierinrecentyears. Therearelargedifferences inseasonaleffects J J betweenlarge andsmallREITs andbetweenequi- SOURCE:ORER ty and mortgage REITs. Figure 1 shows the seasonal patterns in rates ofreturn forthelargest Figure 2 and smallestmortgageREITs, whereas Figure2 shows the same information forequity REITs. AVERAGE IVIONTHLY RATES OF RETURN 1962-85 The January Effectexists foronly the small 15% mortgage andequityREITs. TheJanuaryEffect forsmall mortgage REITs is almost 6.5 percent- agepoints above thatforequityREITs. Howev- SMALLEST EQUITY REITs erin both thecaseofmortgageREITs andthe 10%) caseofequityREITs, theJanuaryrates ofreturn LARGEST EQUITY REITs, are so substantial that itwould seempossible to invest in small REITs in January and investin governmentsecurities forthe restofthe yearin ordertomake areturn well above whatcouldbe considerednormal. The implication ofthese results is that the REITmarket is inefficient. One might invoke the standardexplanations forthe stockmarket January andSizeEffects toexplain REITJanuary andSizeEffects. However, the validity ofthe 5%o- FMAMJ ASONDJ agency argumentmay bequestioned. Itis _L _L J L _L J I I L unclearthatmutual funds are heavily involvedin J theREIT market. SOURCE:ORER Thisfirst issue ofthe ORERLETTER wasproducedasapilotissue. The editor andgraphicdesignerofthis issue wasPeterF. Colwell, the ORERProfessorof RealEstate. In addition, all butone ofthepiecesin thisissue were written by Peter Colwell. The exception is "BuildingActivity inPeoria" which was written by WilliamR. Bryan, Chairman oftheDepartmentofFinance, and Matthew Maher,ResearchAssistant ORER Letter Page Housing Market Efficiency Figure 1 AVERAGE MONTHLY RATES OF RETURN 1970-81 Efficiency inthe housingmarketwouldbesug- gestedby alackofsubstantial seasonaleffects in therateofreturn forhousing. Ifhigherthan nor- malratesofreturnwereexpectedin anyparticular month, sellers wouldbe influenced ... as would buyers ... to adjustthe timing oftheirtransac- tion. This speculative activity woulddriveout the abovenormalreturns associatedwith thetim- ingofhousesales ifthe marketwereefficient. Therefore, substantial seasonaleffects in the housingmarketwouldbeindicativeofinefficien- cyin thatmarket. Also, ifseasonal effects in the housing market look like those found in the stockmarket, theconventionalexplanations wouldbe calledintoquestion. Thatis, itwould bedifficultto argue thateither thetax selling hy- -1% pothesisorthe agencyproblemcouldexplain, say, aJanuaryEffectin thehousing market. If theseexplanations prove tobe inadequate, andit is beginning to look as ifthis is the case, the SOURCE:ORER mysteryoftheseseasonal effectswoulddeepen. Figure 1 shows the seasonal rates ofreturn in Figure 2 oneurbanarea. The highestrateofreturn is for AVERAGE MONTHLY RATES OF RETURN 1958-81 January. Butin addition to aJanuaryEffect, it appears as ifthere is apeakintherateofreturn at thebeginningofeach quarter. The questionthat 10% arises is whether there is anything like this quar- terlyeffectin thestock market. Figure2 shows the seasonal rates ofreturn for middle-sizefirms on theNewYorkStockEx- change. The similarities andthedifferences between dieNewYorkStockExchange andthe housing marketareclearcutbetweenFigures 1 and2. Theprincipaldifferenceis thattherates ofreturn in theNYSE are systematically higherthan therates in the housing market. Onereason for this is that the housing marketrates ofreturn measureonlyappreciation whereas theNYSE ratesofreturnmeasure appreciation andincome (thatis, dividends). Ifone were toimpute in- come to theowners ofhousing, therates ofre- F M A turntohousingownershipwouldbeincreased. SOURCE:ORER Theprincipal similarity between housing mar- ketandNYSEratesofreturn appears tobe the quarterlyeffect. Thatis, besides thewell-known The implicationofthe similarities ofthehousing marketseasonalrateofre- Januaryeffect, thereis apeak approximately at turnpattern withtheNYSE seasonal rateofreturnpattern is that, ifoneexplana- thebeginningofeachquarter. Theoneexception tion is to handle both patterns, it will have to be a new explanation. As ofthe is thatthis effectfortheNYSE lags the effectin present, this is agreatmystery in the fieldsoffinance andrealestate. the housing marketbyone month forthe fourth quarteronly. ORER Letter Page 4 Rho Epsilon Activities The Spring 1987 scheduleofactivities forRho centMetropolitanreal estatedevelopments in the Epsilon was very full. Rho Epsilon is a nation- Indianapolis area. continuedfrompage 1 al real estate fraternity with abusy chapter atthe The thirdfieldtripofthe semesterwas a University ofIllinois. With astudent member- luncheon sponsored by theChicagoChapterof fices is in 304DavidKinley ship ofapproximately 80, there was substantial theSociety ofIndustrial andOfficeRealtors. Hall. TheDirector's office, interestin the eleven formal Rho Epsilon activi- The Vice President, Alan Berggren, chaired anouterSecretary'soffice, ties during the spring semester. theprogramwhich was focusedon SummerIn- andaconferenceroomalong Thetopic ofthe firstmeeting ofthe semester ternships. Six firms with positions available withfourfacultyoffices will was brokerage. Craig Bayless, Vice President wererepresentedand 12students attendedwho bepartofthis suite. andBranchManageratCushman andWakefield, were looking for internship positions. Steve spokeon the subjectofcommercial brokerageon Podolsky, President ofthe SIOR Chapter, pre- 6 NEW PAPERS February 3. sented the U ofI representative, Roger Canna- On February 10, the topic was syndications day, with acheck for$1,500 for tiie SIOR Sofarthis year, six new and acquisitions. The speaker was Michael Scholarship at the U ofI. manuscripts havebeen pub- Herzberg, Senior VicePresidentofJMB Real- On April 21, Corporate Real Estate was the lished as ORER Papers. The ty- principal topic ofthe Rho Epsilon meeting. firstofthese is a study of Commercial leasing was the topic ofthe third James T. Schaefer, Corporate Director of REITs (RealEstateInvest- meeting ofthe semester. A Leasing Agentwith RealEstate forBeatriceFoods, was the speaker. mentTrusts) as contingent RubloffInc. - Office Properties Group, Andrew Afterthepresentation, anelection was heldfor claims by Park andRushing. Davidson spoke on leasing issues at the Febru- the Fall 1987 Officers ofRho Epsilon. Mi- Next, apaperby Sunderman, ary 24 meeting ofRho Epsilon. chael Fine was elected President. Jayne Ro- Cannaday, andColwell ana- The March 3 meetingfocusedon Institutional manchek was electedVicePresident, and lyzes the marketvalueofas- Investments. The speaker was Jerry Garren, a Scott Rubin was elected Secretary. Alissa sumption financing. The VicePresidentin production atMetropolitan Schneider was electedTreasurer. thirdofthis Spring's papers Life. The lastRhoEpsilon meeting ofthe semester concernsrealestateprice The meeting ofMarch 24examinedareasof was held on May 6. The topic was Mortgage bubbles andwas writtenby RealEstateRegulation. The speakers were Banking. The speaker was Jay Strauss, Scott. The fourth paper is Dennis Bennett and Kevin O'Connell Chairman ofthe BoardofFocusFinancial byThomas andReskin and from theFederalHome Loan BankofChicago. Group. Thanks were given to the Spring 1987 is aboutoccupational change A field trip to Chicago was heldon March 27. Officers who did a finejob: Carie Karnezis, andsex integrationinreal Fifteen students and Roger Cannaday, the fa- Dale Cooney, Teresa Connors, and Rich estate sales. The fifth of culty advisor, visited three businesses. Howard Frosser the outgoing President, Vice President, thesepapersdealswith the Walker was the host at Olympia and York. SecretaryandTreasurer,respectively. capitalization oftaxes and Thediscussioncenteredarounddevelopment. At public service benefits across Harris Trust, the host, John Rutledge, dis- jurisdictions. The sixth and cussedreal estate loans andportfolio manage- Rho Epsilon Thriving mostrecentORER Paper is ment. Lunch wasprovidedby Harris Trust. aboutthe real estate impacts Lastly, Jared Shiaes, at Shlaes & Company, Rho Epsilon membership at the University ofIl- oftax reform andwas written discussedreal estate consulting with the RhoEp- linois is near its all-time high. Total new mem- by Follain, Hendershott, and silon group. bershipreached 62during thepastacademic year. Ling. On April 7, Commercial Development was the This is very close to the peak of65 new mem- These, andotherORER topic of the Rho Epsilon meeting. Richard bers during the year 1984-85. Although records Papers canbeobtainedfree Hanson, President ofStein and Company, was are notcomplete.the 1983-84 academic year ap- ofcharge byrequestingthem the speakeron this topic. pears to have been the low point forRho Epsilon from the ORER. The ad- The second field tripofthesemesterwas an membership. dress is on page 8. overnight trip to Indianapolis on April 10 and The previous high membershipyearwas 1979- 11. The trip was sponsored by Metropolitan Life 80. There were 50 new members that year, up continuedonpage5 with Fred Lieblich and Michael Schack as from45 in each ofthe twoprevious years and 32 the hosts. Twelve students and two faculty advi- in the 1976-77, the inagural yearofthecurrent sors, Roger Cannaday and Phil Rushing, charter. attended. The purposeofthe trip was tovisit re- \»-. ORER Letter Page Enrollments Build in Real Estate Enrollmentin the introductoryrealestatecourse, class sizeofabout33.5 andendedwith size at Fundamentals ofReal Estate, has grown steadily 43.9, amorethan thirty percent increase. for all butone ofthe lastsix years. During the Atsome stage, it may becomenecessaryto 1981-82 academic year, enrollmentwas201 stu- move to alecture-discussion section format. dents in all sections. This year enrollment is 439 ProfessorColwell, ORER ProfessorofReal 2 IBR ARTICLES in all sections. The only pause in the growth Estate, has said that "ideal class size for the in- was in the year 1984-85 when there were 350stu- troductorycourse is approximately 25 to 30 stu- The Illinois Business Re- dents enrolled, twofewerthanduring theprevious dents. A lecture-discussion section formatmight view publishedtwo articles year. achieveenrollments of25 students perdiscussion whichweresponsoredby the The numberofsections ofthecourse has also section with a lecture ofabout 200 students. ORER. In the February grown steadily over the past six years. From a The impactfromthestudentperspectiveis 1987 issue ofthe IBR, low ofsix sections offeredin 1981-82, there were mixed. Smallerdiscussion sections make for Schnare wrote aboutthe ten sections offeredduring 1986-87. Theonly better interaction, butthe largelectures allow for measurable decUne in resi- setback in this history ofgrowth was in 1983-84 less interaction." dential segregation in with six, one fewer than the previous year. This Anotherperspectivehas beenexpressedbyPro- Chicago but thought it a historyofgrowth in the numberofsectionsre- fessorBryan, Chairman oftheFinanceDepart- "dubious achievement" given flects an increasing committmentofresources to ment. He said "We oughttoconsiderthe impact thelargerdeclineselsewhere therealestate areaby theCollegeofCommerce ofincreasedservice attheintroductory levelon in the nation. The April and Business Administration. theremainderofthecourseofferings in thereal issueofthe IBR contains an Unfortunately, theincreasedresources havenot estate area. Going to alecture-discussion section articleby Cannaday, Stunard, keptpace withdemand. Class size soaredduring formatin thefirstreal estatecourse may free up andSundermanon the firstcoupleofyears ofthis period. Since teaching resources so thatwecan improve the assessmentuniformity of then ithas plateauedout atahigher level. Figure upperdivisioncourseofferings. We have hadto Chicago condominiums. 1 shows thatthe past seven years began with do this inotherareas within the FinanceDepart- ment. Itcould happen to real estate." FOLLAIN PRESENTS Inrecentmonths theDirector Spring and Fall Course of the ORER, Jim Follain, Figure 1 Offerings has made presentations to Class Size in "Fundamentals" several groups: the National Beyondthe five sections oftheintroductoryreal Tax Association, the estatecourse, theDepartmentofFinance offered AmericanRealEstate and Urban Economics three otherreal estate courses forthe Spring 1987 semester. These threecourses wereReal Estate Association, and agroupof Investment, Real EstateFinancial Markets, and the Home andHousing Real Estate andUrbanLandEconomics, asurvey Economists associatedwith class at the graduate level. the U ofI Extension There arefoursections oftheintroductory Service. coursescheduledfortheFall 1987 semester. In He has also met with the addition, the LegalEnvironmentofRealEstate, staffoftheNational Urban Real Estate Valuation.Urban Economics, Association ofRealtors® to andRealEstateandUrban LandEconomics are discuss ways in which ORER andNAR mightwork alsoscheduled. This basic pattern is repeatedeach yearwith more closely together. fewchanges. The introductory orsurveycourses COLWELL SPEAKS areofferedeachsemester. Otherwise,courses are notrepeatedduring the academic year. * l0CosO0ol oK0o)0 AIo*CcPoOademic\Oi0rDO0>Year ro\CôDO Nounfedyweeracgrorsu.ardsHedosewvheeavlveoeprm,neotnthtbeecroeeunirsasesddoaemndedfaionrgtreaarnedsurtmeaiblnearn CsInoorlJwoaefnlulRa,eraytlhe1Es9Ot8a7Rt,eE,PReptrePerrsoefnetse-d estate financecourse. continuedonpage6 #<- ORER Letter Page CARL WEBBER PROFILE & INTERVIEW - MichaelHoeflich, UofIProfessorofLaw, calls transaction, such as working with peopleon the CarlWebber "asuperbrealestate lawyer." Dean house they wantto live in, is challenging and continuedfrompage5 PeterHayofthe UofI College ofLaw calls him enjoyable. Real estate is aunique amalgamof "afirstratelawyer . . . technicallysuperb "and things you can touch, along with the human as- aresearchproposalonfunc- "very insightful andsensitive topolicy issues." pectofthe community. tionalobsolescence to the CarlWebberisthemostrecentaddition to the HomerHoytAdvancedStudy realestatefacultyatthe UniversityofIllinois. ORER: Whatsortofproblems doyou face in Institute. He will be He will teach theLegalEnvironmentofReal yourrealestatepractice? completing this study and Estate classin theFall 1987semester. presenting it to the Institute Carlisan Urbana-basedattorneyspecializingin CW:One problem is the unknown. It also nextJanuary. Professor realestatelaw. Hehasa1966bachelorsdegree makes things interesting. Acurrentprojectin- Colwell will become aFel- in businessfromNorthwestern University. After volves aclientpurchasing property to start a low ofthe Institute. afouryearstint in theNavy, he went to law small business. Itinvolves the neighboring CANNADAY & schoolatthe UofIgraduating in 1973. landownerforan easement, theneighboring R41c He hasbeenveryactiveinprofessionalservice. tenantforalicense, anotherneighborforasite He hasbeen a memberofthe UofICollege of line, thelenderforfinancing, regional planners RogerCannaday, Associate LawBoardofVisitorssince 1980andamember foraformalreport, and thecity foraconditional ProfessorinFinanceanda oftheIllinoisBarAssociationRealEstate Sec- use permit. It startedout to be simple (many specialistin the areaofap- tion Councilsince 1983. He hasservedbothas do). The seller, imknown to us, merely leased praisal, is currendy both SecretaryandasPresidentoftheChampaign the neighboring property. The titlereport writing apaperonR41c and CountyBarAssociation. Lastyearhe became an showed an easementbenefitting theneighboring organizing a session on the AmericanBarFoundationFellow, having been property, which the sellerdidn'trecall. The sell- topic forthisDecember's anIllinoisBarFoundationFellowsince 1984, erhadtheobligation toobtain areleaseofthe AmericanRealEstateand andthisyearhebeganasalecturerforthe Illi- easement, butcouldn't, since the ownerwas in- UrbanEconomicsAssocia- noisBarAssociation in Continuing Education. accessible "on the Continentfor the summer." tion Meetings in Chicago. Professor WilliamBryan, ChairmanoftheDe- Through aguarantee, alicense, andan adjust- Thepaperwilldemonstrate partmentofFinance at the UofIsays, ". . the mentin theprice, we sorteditoutandclosedon how toproviderequiredmar- FinanceDepartmentisfortunateindeedtohave time. ketsupportforadjustments suchan accomplishedlawyerteachingourreal Another problem is inertia. Institutions often in the sales comparison ap- estate lawclass." Carlwillhave theacademic don'tlike tochange theirposition. A transac- proach. The session will in- rankofAdjunctProfessorofFinanceforhisFall tion might appear to be beneficial to all, butit volveregulators, academics, 1987teaching assignment. still may be difficult to get things moving. To andpracticing appraisers. ORER: What is it that broughtyou to the real rmeocvoer,dswiolmlesohnoewhwashotodmida.keAaddeecciissiioonn,maaknedrtihse ADVISORS ADVISE estatearea? more often lookedupon as being toblamewhen aproblemcomes from arecentdecision, than Threemajordecisionscame ClaWn:d aIn'vdebauliwladiynsgse,njbouyteidtrreefallecetsstataec.omItmsunnoittjyu'sst winhgeintsittoslli.mpIltyisisriasrkeysutlotdoefcitdhee;sstaotmuestqiumoestatkh-e oouftthoefOthReEMRayAd1v4ismoereyting health andpotential. When I was a young boy, decision isn'tmade. Committee. A grant was my fatherwouldoften say "Let's goforadrive," made toLouis Scott to study andwewoulddrive aroundUrbana-Champaign. ORER: Haveyoueverworkedwithinsurance thechanging gapbetween He wouldcontinuallycommenton whatwasde- companies? mortgage interestrates and veloping andon what might be coming. I otherlong-terminterest couldn'tbelievehow much time he would spend CW: We workedfortwo andahalfyears putting rates. Itwas decidedthatthe on such "boring" things as storm wateror the togetherarecenttransaction. Oneparty had to AdvisoryCommittee should distance to the sanitary treatmentplant. I would receive approval oftheirinsurancecompany holdaonedayretreattode- be thinkingonly ofwhatadevelopmentwould lender. They hadbeen unwilling tomake the velop a strategic plan for look like. But in real estate, there is so much contactuntileverything else was finished. ORER. The Committee thatdoesn'tmeet the eye. To get thejob done, Time keptcreeping on. Atlastwe finalized will furtherconsiderthepos- you hadbettermakesure itdrains! everything andwere allowedtorequesttheirin- sibility ofthe ORER organ- It is achallenge in real estate to work with so surancecompany lender's approval aweekorten izing aconferenceonhous- manypeople: lenders, landowners,planners, de- days priortothe scheduledclosing. Wecalled ing financepolicy. velopers, tenants, andon andon. Even abasic the insurancecompany andthey saidthatthey